Zainul and Shazma Holdings Ltd. o/a Holiday Inn Hinton v. The Queen

Zainul and Shazma Holdings Ltd. o/a Holiday Inn Hinton v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-07-27 Neutral citation 2004 TCC 527 File numbers 2003-3229(IT)I Judges and Taxing Officers Terrence O'Connor Subjects Income Tax Act Decision Content Docket: 2003-3229(IT)I BETWEEN: ZAINUL AND SHAZMA HOLDINGS LTD. O/A HOLIDAY INN HINTON, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on June 15, 2004 at Edmonton, Alberta, Before: The Honourable Justice T. O'Connor Appearances: Counsel for the Appellant James C. Yaskowich Counsel for the Respondent: Julie Rogers-Glabush ____________________________________________________________________ JUDGMENT The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is allowed, with costs, in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 27th day of July, 2004. "T. O'Connor" O'Connor, J. Citation:2004TCC527 Date: 20040727 Docket: 2003-3229(IT)I BETWEEN: ZAINUL AND SHAZMA HOLDINGS LTD., O/A HOLIDAY INN HINTON, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT O'Connor, J. [1] The issue in this appeal is whether the Appellant in the taxation year ended December 31, 1998 is liable for a payment of non-resident taxes of $7,871.17 plus interest of $3,491.60 and a penalty of $787.17 all in respect to a payment of $78,717.60 CDN paid to a U.S. Corporation named Holiday Hospitality Franchising, Inc., said $78,717.60 being the total amount of a "One-Time License Fee" paid by the Appellant in relation to the Appellant's application to acquire a Holiday Inn franchise for its existing lodge named The Greentree Lodge in Hinton, Alberta. The sections of the Income Tax Act which are in play are paragraph 212(1)(d) and subparagraph 212(1)(d)(i). [2] The following are the most relevant facts which I have extracted from the Written Submissions of the Appellant: 5. The following is a list of the facts which have been pleaded and admitted by the parties. Where the facts pleaded in the Notice of Appeal were not initially admitted by the Respondent, those facts as modified or restated by the Respondent are now admitted by the Appellant below. The numbers preceding the paragraphs below correspond to the paragraphs in the Notice of Appeal, and the numbers following the paragraphs below correspond to the paragraphs in the Reply. [1] The Appellant was incorporated pursuant to the laws of Alberta on October 1, 1997 and operates various hotels throughout Alberta [paragraph 1]. [2] All of the issued and outstanding shares of the Appellant were owned by Afzal Rajan at all times material to this Notice of Appeal [paragraph 1]. [3] The Appellant carried on business as the Greentree Lodge, a hotel in Hinton, from July 3, 1998 until November 11, 1999, at which time The Greentree Lodge began operating as a Holiday Inn (this hotel is referred to herein as the "Holiday Inn Hinton") [paragraph 1]. [4] In early August, 1998, the Appellant applied to Holiday Hospitality Franchising Inc. ("Franchising Inc.") to acquire a Holiday Inn franchise for the Holiday Inn Hinton. Franchising Inc. is an entity based in the United States which carries on a business of granting Holiday Inn franchises [paragraph 2]. [5] As part of its application to Franchising Inc., the Appellant was required to pay Franchising Inc. a one-time, initial license fee (the "One-Time License Fee") of $78,717.60 CDN ($52,000 USD). The License Fee was calculated based on the flat rate of $500 USD per room in the Holiday Inn Hinton [paragraph 2]. [6] The Appellant did not withhold or remit any amounts to the Canada Customs and Revenue Agency (the "CCRA") with respect to the One-Time License Fee [paragraph 1]. [7] The Appellant's application was successful, and the Holiday Inn Hinton commenced operations on November 11, 1999 [paragraph 1]. [8] As part of its franchise agreement with Franchising Inc., the Appellant is required to pay Franchising Inc. franchise fees (the "Franchise Fees") calculated as 10% of the Holiday Inn Hinton's monthly room sales [paragraph 1]. [9] The Franchise Fees are paid approximately every month and the Appellant has always withheld and remitted to the CCRA, 10% of the amounts paid to Franchising Inc. pursuant to paragraph 212(1)(d) and subsection 215(1) of the Income Tax Act (Canada) (the "Act") and Article XII of the Canada-U.S. Tax Convention (the "Treaty") by the 15th day of the month following the month of payment [paragraph 1]. [10] By Non-Resident Notice of Assessment No. 6200958 (the "1998 Assessment") dated December 12, 2002, the Minister of National Revenue (the "Minister") assessed the Appellant for its taxation year ended December 31, 1998 for non-resident tax of $7,871.76 (the "1998 Assessment Amount") [paragraph 1]. [11] The 1998 Assessment also included "Failure to Deduct" penalties of $787.17 and interest of $3,491.60 [paragraph 1]. [12] In arriving at the 1998 Assessment Amount, the Minister took the position that the One-Time License Fee was a "rent, royalty or similar amount" and therefore subject to a 10% withholding tax pursuant to paragraph 212(1)(d) and subsection 215(1) of the Act and Article XII of the Treaty [paragraph 1]. ... [3] The following facts were also established: 6. The Appellant obtained its license to operate the Holiday Inn Hinton as follows: (a) On August 4, 1998, the Appellant applied to Franchising Inc. to obtain a license for the purpose of operating a Holiday Inn (the "Application"). Franchising Inc. knew of the Appellant since the Appellant had applied for, and obtained a Holiday Inn franchise in 1994 for property owned in south Edmonton, Alberta. (b) An "Application Letter", included at page 16 of the Application, indicates that the Appellant acknowledged and agreed with Franchising Inc., on the following points: (i) that the Appellant would execute and comply with the License Agreement if the Application was approved [paragraph 3]; (ii) that Franchising Inc. did not enter into oral agreements with respect to licenses or matters pertaining to licenses, that any proposed license would come into affect only upon the execution of the License Agreement, and that there were no oral agreements between the Appellant and Franchising Inc. with respect to any proposed license [paragraphs 4(a) and 4(c)]; (iii) that an "Application Fee" (the One-Time License Fee) had been paid to Franchising Inc. to be used at the discretion of [Franchising] Inc. subject to a refund only if the Application was refused, less an "Application Processing Fee" which would not be refunded [paragraph 4(e)]; and (iv) Franchising Inc. had no liability to the Appellant under the Application other than to return the Application Fee less the "Application Processing Fee" [paragraph 4(f)]. (c) ... (d) After receiving the Application during August [of] 1998, Franchising Inc. conducted an inspection of the then "Greentree Inn" pursuant to its Property Improvement Program ("PIP"). The purpose of the PIP was to ensure that a particular property satisfied the standards of Franchising Inc. In particular, the PIP identified "deficiencies" or other areas where the existing hotel was required to upgrade its property or services. (e) During the course of the PIP, the Appellant and Franchising Inc. negotiated the requested upgrades. After the PIP was completed, the Appellant was presented with the PIP report and could either have accepted the terms of the PIP and continued with the application process, or could have rejected the PIP and stopped the process altogether. The Appellant decided to continue with the application process. (f) After reviewing and accepting the PIP report, the Appellant forwarded its acceptance of the PIP report to Franchising Inc. together with payment of the One-Time License Fee of $52,000 USD ($78,717.60 CDN.). The Appellant understood that Franchising Inc. was entitled to retain the One-Time License Fee immediately upon receipt, subject only to rejecting the Application. In that event, a portion of the One-Time License Fee would be refunded to the Appellant. (g) Upon receiving the One-Time License Fee, a committee of Franchising Inc. (the "Franchise Committee") considered the Application. The role of the Franchise Committee was as follows: (i) to review the PIP report which had been negotiated between the parties, and to further determine whether Franchising Inc. was prepared to grant the Appellant a waiver with respect to any of Franchising Inc.'s standards; (ii) to review the Appellant to determine whether the Appellant was capable of operating a Holiday Inn Franchise; and (iii) to examine the location of the proposed Holiday Inn hotel and determine whether granting the franchise would adversely affect any existing Holiday Inns. In particular, Franchising Inc. would solicit and review comments or "objections" from existing franchisees. (h) The Franchise Committee then advised the Appellant that the Appellant's Application had been accepted. (i) After the Application was accepted, the Appellant and Franchising Inc. negotiated and entered into a "Holiday Inn Conversion License Agreement" (the "License Agreement") dated September 30, 1998. 7. The provisions of the License Agreement which are relevant to this Appeal included the following: (a) Grant of License (Article 2) - "Licensor hereby grants to Licensee a non-exclusive license to use the System only at the Hotel, but only in accordance with this License and only during the "License Term" beginning with the date hereof and terminating under paragraph 12 hereof."... (b) Fees (Article 3.C.1, as amended) - "For each month (or part of a month) during the License Term, Licensee will pay to Licensor by the 15th of the following month: (i) a royalty of 4.5%, of the Gross Rooms Revenue attributable to or payable for rental of guest rooms at the Hotel with deduction for sales and room taxes only ("Gross Rooms Revenue")... (ii) a "Services Contribution" equal to 2.5% of Gross Rooms Revenue to be used by Licensor for marketing, reservations, and other related activities which, in Licensor's sole business judgment as to the long-term interests of the System support marketing, reservations and other related functions. Costs which a Licensee incurs in the acquisition, installation or maintenance of reservations services, equipment or training, or in its own marketing activities, do not constitute payment of the "Services Contribution"... (iii) a monthly Reservations System Fee of $6.43 for each guest room at the Hotel plus such increases as Licensor may judge reasonable; (iv) all fee due for Travel Agent Commission Programs and Hotel Marketing Association and Field Marketing Co-op Programs attributable to the Hotel; and but in no case exceeding in any calendar year 10% of the fee in effect at the beginning of that year; and (v) an amount equal to any sales, gross receipts or similar tax imposed on Licensor and calculated solely on payments required hereunder, unless the tax is an optional alternative to an income tax otherwise payable by Licensor. Licensee will operate the Hotel so as to maximize gross rooms revenues of the Hotel consistent with sound marketing and industry practice and will not engage in any conduct which reduces gross rooms revenues of the Hotel in order to further other business activities." (c) Fees (Article 3.C.2) - "A standard initial fee as set forth in Licensor's then current Offering Circular for Prospective Franchisees will be charged upon application for any guest rooms to be added to the Hotel." (d) Fees (Article 3.C.5) - "Each payment under this paragraph 3.C, except the standard initial fee, shall be accompanied by the monthly statement referred to in paragraph 8.A...." (e) Change of Ownership ... (f) Change of Ownership ... (g) Payment of Liquidated Damages ... (h) Performance of Work ... ... Appellant's Written Submissions [4] Counsel for the Appellants submitted several arguments. In my opinion the most relevant are found at paragraphs 19 and following of counsel's Written Submissions. These paragraphs read as follows: ... 19. If it is accepted that paragraph 212(1)(d) is not to be given an expansive reading, then it is submitted that the Minister's assessment must fail because the One-Time License Fee does not fall within any accepted definition of "rent" or "royalty". In H.M.Q. v. Saint John Shipbuilding, the Federal Court of Appeal held that a fee paid for the indefinite and unrestricted use of tapes containing technical data, including user and programming manuals, was not either rent or a royalty. The same conclusion was reached in Farmparts on this narrow issue. H.M.Q. v. Saint John Shipbuilding, 1980 CarswellNat 257, [1980] C.T.C. 352 (F.C.A.), paragraphs 14 and 15, Tab 9. H.M.Q. v. Farmparts Distributing Ltd., paragraphs 23 and the cases cited therein, Tab 2 20. To conclude on this point, we adopt the reasoning of Duncan Osborne in his article "Revisiting Royalties in the Age of Electronic Commerce" where, at page 440 he makes the following comments with respect to the Canada Revenue Agency's policy on lump sum "royalties", which parallel the comments made by the Federal Court of Appeal in Farmparts, discussed above: Revenue Canada's administrative position is that the opening words "including, but not so as to restrict the generality of the foregoing, any payment" has the effect of bringing within the scope of the provision any payment described in subparagraphs 212(1)(d)(i) through (v), which need not be a rent, royalty, or similar payment. In effect, Revenue Canada extends the application of subparagraphs 212(1)(d)(i) to include any payment, including a single or lump-sum payment, for the right to use, in Canada, any property, etc., whether or not the amount would be considered a rent, royalty, or similar payment. This interpretation cannot possibly be correct. If any payment for the use of, or the right to use, property is subject to withholding under subparagraph 212(1)(d)(i), there is no purpose behind the inclusion of the words "rent, royalty or similar payment." Furthermore, the language of the provision does not support Revenue Canada's interpretation. The words "including, but not so as to restrict the generality of the foregoing, any payment" suggest that the payments in subparagraph 212(1)(d)(i) cannot be broader than those implied by the opening words. Revenue Canada's interpretation has the opposite result [footnotes omitted]. Revisiting Royalties in the Age of Electronic Commerce, (supra), page 440, Tab 4 The Use Of, Or The Right to Use, Any Property - Subparagraph 12(1)(d)(i) 21. If this Court concludes that the One-Time License Fee is not a payment in the nature of rent, royalty or similar payment for the purposes of paragraph 212(1)(d), but also concludes that the payment is in respect of "any property, invention, trade-name, patent, trade-mark, design or model, plan, secret formula, process or other thing whatever", for the purposes of subparagraph 212(1)(d)(i), then it is submitted that the One-Time License Fee was not paid by the Appellant "for the use of or for the right to use in Canada" the property set out above. 22. The One-Time License Fee was made solely for the purpose of satisfying the Application requirements of Franchising Inc. The only act that Franchising Inc. was required to perform to earn the Fee was to accept the Appellant as a franchisee. After accepting the Application and thus receiving the legal entitlement to retain the Application fee, Franchising Inc. and the Appellant were free to enter into the License Agreement which would establish further legal relations. 23. The License Agreement sets out all of the terms which govern the relationship between the Appellant and Franchising Inc. In return for the know-how and other services that Franchising Inc. was to provide to the Appellant, the Appellant agreed to pay a fee based upon, for the most part, its sales from carrying on the hotel business. 24. It is submitted that no portion of the One-Time License Fee was paid for any of the services or rights to use Franchising Inc.'s property, all of which was governed by the License Agreement. 25. In Brad-Lea Meadows Ltd. v. M.N.R., the Tax Court of Canada found that a one-time "affiliation fee", paid to offset the cost of certain services provided by the franchisor to new franchisees such as training, advertising, design and other matters, was not a "royalty" because it was made up of many things, including "fees for services". At paragraph 16, the Court stated: Counsel for the Minister stressed the words "any payment" but one must read these words in conjunction with the words that follow: "for the use of or for the right to use in Canada etc.". Many of the items described in the fee paid do not involve any "use" but are services which the taxpayer may or may not take advantage of as needed or wanted. Thus the so-called package does not consist of all-inclusive items contemplated by subparagraph 212(1)(d)(i). The result is that because no separation was made the taxpayer must succeed. There is no need for the Court to decide what items, if any, could be considered as royalty payments. Brad-Lea Meadows Ltd. v. M.N.R., 1990 CarswellNat 285, [1990] 1 C.T.C. 2306 (T.C.C.), paragraph 16, Tab 10 26. The issue in Brad-Lae Meadows Ltd. was whether a payment for services constituted a payment for the "right to use" property. The Tax Court found that such a payment did not satisfy the test. Likewise, it is submitted that before a payment can be said to be "for the use of or the right to use... any property...or other thing whatever", there must either be a property of the non-resident which is capable of being used by the resident in any particular case, or there must be property over which the resident has a right of use. 27. The One-Time License Fee was not paid for the "use" of any property since there was neither property of the non-resident Franchising Inc. that was being used by the Appellant at the time of the Application, nor was there any property over which the Appellant had a right of use. 28. The Appellant's rights to use the Franchisor's property arose only after the License Agreement was executed and only after all of the Appellant's obligations under the License Agreement had been satisfied or were to be satisfied within a stipulated period of time. In particular, paragraphs 4(a) to (c) of the Application and paragraph 14(I) of the License Agreement make it clear that the ability to operate as a Holiday Inn is expressly reliant upon execution of the License Agreement and performance of the "Work", as defined. 29. As a result of the above, it is submitted that no part of the One-Time License Fee was paid for the use of, or right to use any property, and that subparagraph 212(1)(d)(i) does not apply to tax the One-time License Fee. ... Respondent's Written Submissions [5] The Respondent's Written Submissions after reviewing the facts which generally are not in dispute read as follows: ... D. Argument I. The Payment was an Initial Franchise Fee for the purposes of obtaining a license 21. The Franchise Fee was the consideration paid to obtain the Franchise Agreement. The Franchise Agreement grants the right to use items enumerated in s. 212(1)(d). As such, the payment is subject to withholding pursuant to s. 215(1). 22. The Ontario Disclosure document clearly indicates that the Fee is treated by the Franchisor as an initial Franchise Fee. 23. The Franchisor is required by the Alberta Franchises Act to disclose the Initial Franchise Fee and Other Fees. The Franchisor specifically discloses this payment as being such a payment along with the 5% Royalty fee. Tab 2, Schedule 1, para 7 Disclosure Document, Exhibit 2, pg.7 24. The Franchisor is also required to disclose his financial statements. The filed Statement of Income indicates that "Initial Franchise Fees" are reported as revenues". The Summary of Significant Accounting Policies clearly indicates that these "initial franchise fees are recognized as income when the franchise agreements are executed...[and] until that time, any initial fees received...[are held] as deposits". If there was an ongoing "service" component to the initial fee, the initial payment would not have been recognized as income in 1999, only the part that related to aspects of the contract that had been performed. The part of the payment that related to the future provision of services would have been credited to the unearned revenue account of the Franchisor. Tab 2, Schedule 1, para. 21 Exhibit 2, Exhibit B-6 & B-10 25. It is also important to note that had the initial fee been simply an application fee then it would have been recognized as income in 1998 when it was received by the Franchisor. There would be no need to defer its recognition as revenue until 1999. 26. Further, the Franchisor clearly indicates the purpose of the fee is "for standard Licence". The Franchisor also sets out separately the fees for the services provided by the Franchisee. Disclosure Document, Exhibit C-1 and pages 8-11 27. The Franchisee attached the licence Agreement which clearly indicates that it is for the purpose of the matters enumerated in subparagraph 212(1)(d)(i). For example the licence Agreement states: a. "Licensee desires to enter into this Licence in order to obtain a licence to use the System in the operation of the specific brand of hotel..." b. "Licensor hereby grants to the Licensee a non-exclusive licence to use the System" and which defines the "System" c. "The System is composed of all elements which are designed to identify Holiday Inn hotels .....and all elements which identify or reflect the quality standards and business practices of such hotels,....the trade-marks.." Disclosure Document, Exhibit G-5 & G-6 28. The initial payment is excessive to cover administrative costs in connection with processing a licence application. It is also questionable that the fee represents an application fee considering the method (by reference to the number of rooms) used to calculate the amount, and how the amount varies depending on the type of hotel franchise acquired with a stipulated minimum amount and the fact the Franchise Fee is refundable. 29. The Licence application indicates that the "Application Fee" is returned if withdrawn or refused less the "Application Processing Fee for expenses incurred by HHFI, as solely determined by HHFI, in processing the Application". Appellant's Document, Licence Application para 4(e) II. Payment Included by Operation of Statute - s. 212(1)(d), s. 212(1)(d)(i) 30. A review of the structure of paragraph 212(1)(d), shows a clear intention by parliament to, through the operation of the statute, include the items enumerated from (i) to (v) and to exclude the items from (vi) to (xi) by definition in the meaning of rent, royalty or similar payment. The Queen v. Farmparts Distributing Ltd. (Respondent) [1980] 2 F.C. 206 (F.C.A.) @ para 9 and para 11. Hasbro CanadaInv. v. Canada[1998] T.C.J. No. 948 @ para 16, 1998 CarswellNat 2082 @ 18 (Appellant's Cases) The Queen v. Saint John Shipbuilding & Dry Dock Co. Ltd. 80 D.T.C. 6272(FCA) @ 6274 31. Paragraph 212(1)(d) should be interpreted broadly. In United Geophysical Thurlow J. commented in his decision: It is, I think, apparent from the use in the section of the wording which follows the words "rent" or "royalty" that Parliament did not intend to limit the type of income referred to in the subsection to either what could strictly be called "rent" or "royalty"...It seems to me, therefore, that [paragraph 212(1)(d)] includes any payment which is similar to rent but which is payable in respect of personal property. 32. In Farmparts the Federal Court of Appeal agreed with the Crown's position that the 1968 amendment to the section widened paragraph 212(1)(d). Now such a payment, whether single or lump-sum, is subject to the charge of the section, whether or not it falls within the categories of rent, royalty or a similar payment. This is because of the words immediately following the introductory words in paragraph 212(1)(d), namely, "...including, but not so as to restrict the generality of the foregoing, any payment." The Queen v. Farmparts Distributing Ltd. (Respondent) [1980] 2 F.C. 206 (F.C.A.) @ paras 10-12. 33. The OECD Model Tax Convention on Income and Capital commentary on Article 12 clearly reflects that franchise fees are the type of payment caught by the royalties' article. OECD, OECD Model Tax Convention on Income and Capital, Commentary on Article 12 Concerning the Taxation of Royalties, para 11.6 34. Further, while the Canada-US Income Tax Treaty specifically excludes from withholding tax payments for the use of, or the right to use, any patent or any information concerning industrial, commercial or scientific experience, the treaty makes it clear that this exclusion does not apply to any such information provided in connection with a franchise agreement. III. Lump sum payments are contemplated by section 212(1)(d) 35. It is not relevant whether or not the payment in issue is based on use or profits or is periodic. It only matters that it is a payment included in (i) through (v) and not excluded by paragraphs (vi) to (xi). Queen v. Farmparts Distributing Ltd. 80 DTC 6157 (FCA) 36. In Vauban Productions, the taxpayer paid a fixed flat amount per film for distributorship rights irregardless of use. The court held that because all of the rights had not been transferred, the payments constituted lease payments and were subject to withholding tax. The facts are directly comparable here. Vauban v. R. [1975] C.T.C. 5111 (Fed T.D.); affirmed [1979 C.T.C. 262 (Fed. C.A.) 37. Further, in Drydock, the Federal Court of Appeal held that a rental or royalty payment can be subject to withholding tax even if it is a lump-sum amount provided that the payment is not for the use of the property for an indefinite period. In this case, paragraph 12 of the Licence Agreement sets out a fixed term. Disclosure Document, page G-27 The Queen v. Saint John Shipbuilding & Dry Dock Co. Ltd.,[1981] 1 F.C. 334 (F.C.A.) IV. Divisibility of the fee 38. In some cases the courts have held that there is an onus on the Minister to separate out elements of the payment that are for non-property items, e.g. services, which are not subject to withholding tax. Queen v. Farmparts Distributing Ltd. 80 DTC 6157 (FCA) 39. In the present case, however, the service elements of the Franchise Agreement are paid for separately and are not included in the initial payment that is at issue. In Farmparts the payment was primarily for services. Further, in Farmparts the fee was not calculated in reference to volume. It was a fixed fee. In the present case, the fee is a per room fee. Disclosure Document, page 8 40. It is clear that the initial payment is just for the standard Licence. Disclosure Document, Exhibit C-1 41. It is also clear that the initial payment is not a straight application fee in that the payment per room is reduced if the licence period is only 25-60 months. Further, the amount, less an administrative fee, is refunded if the application is not accepted. Disclosure Document, pages 7-8 42. It is further submitted that even if there were service elements embedded in the initial payment, which is denied, it is established international law that with respect to franchise agreements, in the royalty context, if one part of what is being provided constitutes the principal purpose of the contract and the other parts are only ancillary and largely unimportant, then the treatment applicable to the principal part should generally be applied to the whole amount of the compensation - there is no need to apportion. OECD, OECD Model Tax Convention on Income and Capital,Commentary on Article 12 Concerning the Taxation of Royalties, para 11.6 43. In any event, it is not possible to separate the property elements of the initial fee from the non-property elements, as the Appellant did not provide the auditor or appeals officer with any information regarding the purpose of the fee. The Amended Notice of Appeal also does not raise any facts or issues relating to non-taxable uses of part of the payment. It specifically identifies the argument as being that the payment "was not in any way for the purposes of paragraph 212(d)(i)". Analysis and Conclusion [6] In my opinion the submissions of counsel for the Appellant are correct. The Application fee or initial licence fee does not partake of the nature of a rent or royalty or similar payment. A fee paid at the time of an application for a franchise as opposed to a payment made after a franchise has been granted, as in the present case after the franchise was granted certain royalties were paid and these were subject to the 10% withholding tax. In essence the application fee is not a rent or royalty but rather some form of compensation to Franchising Inc. to compensate it for the extensive PIP review, detailed above. In other words considerable time and effort and presumably monies were expended in analyzing the situation of the applicant and only after that an analysis was conclusive of allowing the granting of a licence, was the licence actually granted and the on-going relationship between the Holiday Inn and the Appellant began. The application fee was simply that, an application fee, an initial fee, definitely not a rent or royalty. [7] I am also satisfied that the position of counsel for the Appellant with respect to subparagraph 212(1)(d)(i) is correct. [8] For all of the above Reasons the appeal is allowed with costs. Signed at Ottawa, Canada, this 27th day of July, 2004. "T. O'Connor" O'Connor, J. CITATION: 2004TCC527 COURT FILE NO.: 2003-3229(IT)I STYLE OF CAUSE: Zainul and Shazma Holdings Ltd. o/a Holding Inn Hinton and Her Majesty The Queen PLACE OF HEARING: Edmonton, Alberta DATE OF HEARING: June 15, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice T. O'Connor DATE OF JUDGMENT: July 27, 2004 APPEARANCES: Counsel for the Appellant: James C. Yaskowich Counsel for the Respondent: Julie Rogers-Glabush COUNSEL OF RECORD: For the Appellant: Name: James C. Yaskowich Firm: Felesky Flynn, LLP For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada